14Q - Intermediate Accounting (Kieso)

Question

How should correction of errors be reported in the financial statements?

Step-by-Step Solution

Answer

In the financial statements, error correction is reported by adjusting to the beginning balance of retained earnings. 

Step 1: Meaning of Retained Earnings

Retained earnings are the accumulated profits left after making dividend payments to the shareholders. A growth-focused company may retain these earnings in the business instead of distributing them to shareholders.

Step 2: Explanation of reporting of correction of errors

Correction errors in prior period adjustments can be corrected by making the journal entries in the accounts. Correction of an error is recorded in the year the error has been discovered. In the financial statements, it is shown as the adjustments in the retained earnings balance in the beginning.